Category: Compensation & Employee Benefits; Corporations Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com S corporation made distributions to shareholder employees and reported amounts on Form 1099. IRS has asserted that the amounts should be treated as wages subject to withholdings. Taxpayer asserts that related corporation is common paymaster and wages paid by related corporation have satisfied FICA maximum. IRS appears to be correct because common paymaster rules seem to require that moneys come from related corporation, not the S corporation. The task is to search for existence of anything further to support the taxpayer's position. It is extremely clear that the so-called common paymaster rules of §3121(s) require that all the wages subject to the common paymaster rules be paid from one corporation which acts as the common payor and who is responsible for all record keeping and tax filing functions. Both the language of the statute as well as the underlying regulations make this point very clearly. Revenue Ruling 81-21 which you found in your research drives home the point as well. I am unable to locate anything to indicate that the statute and the interpretive regulations do not mean precisely what they so clearly say. It seems to me that given the clarity of the controlling statute and its regulations, the taxpayer in this case has no hope of success. It seems almost equally hopeless to pursue the argument that the physicians are not really employees of the S corporation. I assume that you have already pressed this point with the IRS. In addition to all the other existing barriers to successful classification of these individuals as independent contractors, there is the additional problem that shareholders of an S corporation are effectively required by Revenue Ruling 74-44, 1974-1 CB 287, to be reasonably compensated for their services or be faced with the possibility of reclassification of distributions as de facto wages. |
